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1 introduction to financial system.ppt
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- 2. 1-2 Introduction • Every financialtransaction has a story. • There is a complex web of interdependent institutions and markets making up the foundation of daily financial transactions. • The Six Parts of the Financial System. • The Five Core Principles of Money and Banking.
- 3. • What causesa company to have a particular stock value? • How can managers make choices that add value to their companies? • How can managers ensure that their companies don’t run out of cash while executing their plans? What three questions does financial management seek to answer?
- 4. • The primarygoal is shareholder wealth maximization, which translates to maximizing stock price. • Should firms behave ethically? YES! • Do firms have any responsibilities to society at large? • YES! • Shareholders are also members of society. Goals of the Corporation
- 5. • An agencyrelationship exists whenever a principal hires an agent to act on his or her behalf. • Within a corporation, agency relationships exist between: • Shareholders and managers • Shareholders and creditors Agency Relationships
- 6. • Managers arenaturally inclined to act in their own best interests. • But the following factors affect managerial behavior: • Managerial compensation plans • Direct intervention by shareholders • The threat of firing • The threat of takeover Shareholders versus Managers
- 7. • Shareholders (throughmanagers) could take actions to maximize stock price that are detrimental to creditors. • In the long run, such actions will raise the cost of debt and ultimately lower stock price. Shareholders versus Creditors
- 8. Financial system • Thefinancial system is the collection of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other securities are traded, interest rates are determined, and financial services are produced and delivered around the world.
- 9. 1-9 Six Parts ofthe Financial System 1. Money To pay for purchases and store wealth. 2. Financial Instruments To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. 3. Financial Markets To buy and sell financial instruments. 4. Financial Institutions To provide access to financial markets, collect information & provide services. 5. Regulatory Agencies To provide oversight for financial system. 6. Central Banks To monitor financial Institutions and stabilize the economy.
- 10. 1-10 Six Parts ofthe Financial System 1. Money Money is anything that is widely used for making payments and accounting for debts and credits. •Money has changed from gold/silver coins to paper currency to electronic funds. •Cash can be obtained from an ATM any where in the world. •Bills are paid and transactions are checked online.
- 11. 1-11 Six Parts ofthe Financial System 2. Financial instruments A financial instrument is a formal obligation that entitles one party to receive payments and/or a share of assets from another party. • Buying and selling individual stocks used to be only for the wealthy. • Today we have mutual funds and other stocks available through banks or online. • Putting together a portfolio is open to everyone.
- 12. 1-12 Six Parts ofthe Financial System 3. Financial Markets Places or networks where financial instruments can be sold quickly and cheaply. •Once financial markets were located in Coffeehouses and Pubs. •Then organized markets were created, like the New York Stock Exchange. •Now transactions are mostly handled by electronic markets. • This has reduced the cost of processing financial transactions. •There is a much broader array of financial instruments available.
- 13. 1-13 Six Parts ofthe Financial System 4. Financial Institutions Firms that provide savers and borrowers with access to financial instruments and financial markets. •Examples: Banks, insurance companies, mutual funds, brokerage houses etc. •Banks began as vaults, developed into institutions, to today’s financial supermarket. •Offer a huge assortment of financial products and services.
- 14. 1-14 Six Parts ofthe Financial System 5. Government regulatory agencies • Government regulatory agencies were introduced by federal government after the Great Depression. • Government regulatory agencies provide wide- ranging financial regulation - rules and supervision. • Government regulatory agencies examine the systems a bank uses to manage its risk. • The 2007-2009 financial crises has led governments to consider greater regulation.
- 15. 1-15 Six Parts ofthe Financial System 6. Central banks A central bank is a large financial institution that handles the government's finances, regulates the supply of money and credit in the economy, and serves as the bank to commercial banks. •Central banks began as large private banks to finance wars. •Central banks control the availability of money and credit to ensure low inflation, high growth and stability of financial system. •Today’s policymakers strive for transparency in their operations.
- 16. 1-16 Five Core Principlesof Financial System Core Principles of Money and Banking 1.Time has value. 2.Risk requires compensation. 3.Information is the basis for decisions. 4.Markets determine prices and allocation resources. 5.Stability improves welfare.
- 17. 1-17 Five Core Principlesof Financial System A. Time has value • A dollar today is worth more than a dollar a year from now…….why???? • Time affects the value of financial instruments. • Interest is paid to compensate the lenders for the time the borrowers have their money. • Understanding of interest rates and how to use them is very important.
- 18. 1-18 Five Core Principlesof Financial System B. Risk requires Compensation • "Risk" refers to potential financial losses, because of unwanted events. • For ever asset like stocks and bonds etc. the higher the risk, the higher the return has to be. • In a world of uncertainty, individuals will accept risk only if they are compensated. • In the financial world, compensation comes in the form of explicit payments: the higher the risk the bigger the payment.
- 19. 1-19 Five Core Principlesof Financial System C. Information is the basis for decisions • We live in a world of imperfect information. • For financial transactions to take place parties must have adequate information. • The more important the decision, the more information we gather. • Collection and processing of information is the foundation of the financial system. • Advances in computer and communications technology have helped the spread of financial information, • Thereby paving the way for the growth of financial markets.
- 20. 1-20 Five Core Principlesof Financial System D. Markets determine Prices and Allocate Resources. • Markets are the core of the economic system. • Markets channelize Resources (saver and Brower) • And minimize the cost of gathering information and making transactions. • The better developed the financial markets, the faster the country will grow.
- 21. 1-21 Five Core Principlesof Financial System E. Stability improves welfare. • A stable economy reduces risk and improves everyone's welfare. • Financial instability in the autumn of 2008 triggered the worse global downturn since the Great Depression. • The central banks are now expected to keep inflation low and stable, and also to avoid or minimize recessions. • A stable economy grows faster than an unstable one.
- 22. Functions Performed bythe Global Financial System and the Financial Markets • Savings function. The global system of financial markets and institutions provides a conduit for the public’s savings. • Wealth function. The financial instruments sold in the money and capital markets provide an excellent way to store wealth. • Liquidity function. Financial markets provide liquidity for savers who hold financial instruments but are in need of money.
- 23. Functions Performed bythe Global Financial System and the Financial Markets • Credit function. Global financial markets furnish credit to finance consumption and investment spending. • Payments function. The global financial system provides a mechanism for making payments for goods and services.
- 24. Functions Performed bythe Global Financial System and the Financial Markets • Risk protection function. The financial markets around the world offer businesses, consumers, and governments protection against life, health, property, and income risks. • Policy function. The financial markets are a channel through which governments may attempt to stabilize the economy and avoid inflation.
- 25. 1-25 Sources • Daily • NewsPaper (English) • Business Recorder • The Wall Street Journal • Financial Times • Bloomberg.com • Yahoo Finance • CFA Blogs • Thomson Reuters blogs • Weekly • The Economist • Business Week • Organizational Data • BIS • SBP • World Bank